Rule in foss v harbottle, Business Law and Ethics

RULE IN FOSS v HARBOTTLE:

What has come to be recognized in company law as "the rule in Foss v Harbottle" is the decision of Vice-Chancellor Wigram in the case of Foss v Harbottle in which the facts, briefly, were as follows.

The plaintiffs, Foss and Turton, were shareholders in a company called The Victoria Park Co. which was formed by statute to buy land for use as a pleasure park. The defendants were the company's five directors and others. The plaintiffs alleged that the defendants had defrauded the company in various ways, and in particular that certain of the defendants had sold land belonging to them to the company at an exorbitant price. They asked the court to order the defendants to make good the losses to the company and also sought the appointment of a receiver.

It was held that it was incompetent for the plaintiffs to bring such going on, the sole right to do so being that of the company in its corporate character. The judge stated:

"In law the corporation and the aggregate members of the corporation are not the same thing for purposes like this; and the only question can be whether the facts alleged in this case justify a departure from the rule that, prima facie, would utilize that the corporation should sue in its own name and in its corporate character or in the name of someone whom the law has appointed to be its representative."

The judge eventually concluded that no departure from the rule was justified in the case before him. The same rule was restated with more clarity by Lord Davey in Burland v Earle when he stated;

"In order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, the action there should prima facie be brought by the company itself."